‘Free’ Phones Have Hefty Price for Other Telephone Users

Fraud and abuse continue in a government-run phone service for low-income Americans, and the cost of the Lifeline program continues to escalate in Minnesota, a Watchdog Minnesota Bureau review shows.

Despite a supposed federal crackdown on abuse, the program remains the gift that keeps on taking from consumers, who pay a Universal Service Fund fee on their phone bills to underwrite the “free” plans.

Lifeline began in 1985 as a subsidy to provide basic landline phone service to low-income families. The addition of cell phone service propelled the national cost of the “uncapped” or open-ended program from $800 million in 2005 to $2.2 billion in 2012.

An analysis of 2013 government payments to Minnesota phone companies shows the cost of Lifeline service rose to $9.5 million, a 60 percent increase in program outlays since so-called “Obamaphones” came to Minnesota two years ago. Lifeline’s phone bill totaled $5.9 million PC—pre-cell—in 2011. The program dialed up $9.1 million in total costs in 2012, according to the annual report.

“This figure will likely rise, and there is no limit to how much could be provided in Minnesota,” states a presentation titled “Everything You Need to Know About Lifeline Supported Cell Phones” by the Minnesota Public Utilities Commission and Open Access Communications, an advocacy group for the needy.

Subsidized cell phone users flooded the marketplace in the first year Minnesota offered the free coverage. Of 86,800 residents receiving Lifeline phone subsidies in 2012, 34,750, or 40 percent, were prepaid cell phone users, versus 52,100 land-line subscribers, the MPUC says. The user breakdown for 2013 is not yet available.

Costs Rise with Reforms

Total costs rose even as reforms required by the Federal Communications Commission resulted in thousands of Minnesotans being kicked off the program. Providers began verifying applicants’ eligibility every year starting in 2012, and up to 33,000 Minnesotans who failed to respond or still qualify were purged from Lifeline’s rolls.

At the time, state utilities officials worried the reforms went too far. “The Commission is concerned about the number of customers that have been de-enrolled under the new process. Undoubtedly, many of the non-responding customers are no longer Lifeline-eligible. However, some eligible subscribers were de-enrolled,” stated a Minnesota Public Utilities Commission July 2013 directive approving the outcome.

“The Commission assisted many customers, including many elderly, reapply for the program after they were removed,” said Dan Wolf, MPUC management and assistance executive secretary. “Most frequently they cited never having to take action to maintain their benefits before as the reason they did not respond to the re-certification letter.”

Anyone earning less than 135 percent of poverty level income or participating in food stamps, heating assistance, or several other government programs automatically qualifies for the benefit. Providers receive $9.25 a month for qualifying landline or mobile subscribers lured by gratis phones and 250-minute plans with voicemail and text service.

‘Problem Isn’t Going Away’

“You’ve got a few bad actors who built their business model on giving away free cell phones and Wi-Fi support,” said Brent Christensen, president and CEO of the Minnesota Telecom Alliance, a trade group for local phone companies. “Until that gets corrected, this problem isn’t going away, and they have no motivation to fix this problem.”

Kay Olson, a former nurse who lives in Duluth, applied for free service in 2012.

“I’m on Social Security disability and very low income,” said Olson in a cell phone interview. “I’ve had many, many surgeries and I’d much rather be working, but I’m on low income.”

Recipient Sees Little Benefit

Olson signed up for a plan that provides 125 minutes per month but allows her to roll over unused time. She may never get to use it. Unlike other recipients she knows who rely on Lifeline coverage, Olson experienced technical problems from day one. When Watchdog Minnesota Bureau contacted her, we called a phone she paid for out of her own pocket.

“I very seldom use the free phone because it’s really hard to hear on,” said Olson, who has accumulated hundreds of unused minutes. “To be honest, I have another phone line. I was hoping to get rid of the phone you’re talking to me on but I haven’t because the free phone is very, very staticy and kind of unreliable.”

Recent FCC news releases tout progress nationally in targeting waste and abuse, reducing Lifeline’s cost to $1.8 billion last year. More than two million users with duplicate phones have been eliminated, while the agency has levied $90 million in fines against providers in recent months for alleged violations. A national database goes online this spring to help providers weed out duplicate accounts.

“I have proposed getting rid of the program’s entire cell phone component, so I’m not trying to reform it to save it,” said Rep. Tim Griffin (R-AK), whose bill would return Lifeline to landline only assistance. “I’ve got all sorts of problems with it. The incentives basically tell these companies, give out as many of these phones as you can and you’ll continue to get more and more money.”

The money going to Lifeline puts more pressure on other programs paid for out of the Universal Service Fund, including expanding broadband Internet access in underserved areas.

“It’s having a negative effect on the Universal Service Fund as a whole, which is directly affecting how we deploy broadband in rural Minnesota,” said Christensen.